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Convergent, Repetitive, and Switching Effects:
Foreign Entry Attempts of U.S. Firms in Eleven Transition Economies
Jun Xia
Management Department
Rawls School of Business
Texas Tech University
Lubbock, TX 79409-2101
Tel: 806-742-1534
Fax: 806-742-2308
Email:
Kimberly Boal
Management Department
Rawls School of Business
Texas Tech University
Lubbock, TX 79409-2101
Tel: 806-742-2150
Fax: 806-742-2308
Email:
ANDREW DELIOS
Department of Business Policy
National University of Singapore
1 Business Link, 117592
SINGAPORE
Tel: 65-6874-3094
Fax: 65-6775-5059
Email:
Convergent, Repetitive, and Switching Effects:
Foreign Entry Attempts of U.S. Firms in Eleven Transition Economies
Abstract
Strategic change in foreign entry attempts is an important theoretical yet understudied issue in the international management literature. Using institutional condition and firm experience as two critical dimensions, we conceptualize foreign entry strategies into two large groups: relational entry and hierarchical entry. According to institutional theory, convergent effect will take place when local institutional conditions change. Scholars have demonstrated a repetitive effect that occurs when firms with a particular entry experience in a given host country attempt to use the same entry strategy in that country. We further explore a switching effect that occurs when relational entry experience increases firms’ hierarchical entry attempts. We explore how firms with more entry experience, as compared to de nova entrants, respond to the external change. Using event history analysis, we examine the entry attempts of 220 U.S. firms in the eleven EU accession and associated transition economies during the period of 1990-2003. Our study extends previous studies on the repetitive and inertial effect of firm experience and provides a more complete picture on the switching effect of firm experience and convergent effect of local institutional conditions on the shift in different foreign entry attempts.
Keywords:
Entry attempt, experience, institutional condition, institutional theory, transition economy
Research on organizations emphasizes a convergence effect: According to institutional theory, oorganizational forms and strategies tend to converge around common templates in an institutional environment under the pressure of existing norms in the field (DiMaggio & Powell, 1983; Greenwood, Suddaby, & Hinings, 2002). Such research has been grounded in fairly stable institutional environments, yet From a longitudinal perspective, we may see that institutional environments change,institutional environments can change over a sufficient period of time. resulting in shift in firm strategies. In the context of tTransition economies, for example, foreign firms benefited from their early convergence on relational entry strategies such as joint venture under the circumstance of weak institutional support. Over time, nevertheless, thhave been in a process of shifting from centrally planned economic systems to a transactional environment in which e market-oriented institutional transitions begin to achieve a heightened importance (Newman, 2000). In line with this shift, firm strategies have tended to transition from relational entry modes, such as joint ventures, has led to the late convergence of foreign entry toward hierarchical entry strategies, such as acquisition (Hoskisson, Eden, Lau, and Wright, 2000; Peng, 2003).
The issue of entry mode – such as whether a firm uses a joint venture, acquisition or greenfield to enter a country, is a particularly important component of a firm’s entry strategy into a foreign market. Research has identified that When existing firms beget new ventures in a foreign market, they must choose a particular organizational form or entry mode strategy. It is typically assumed that firms with multiple entries attempt tend to to use the same entry strategy, when entering in a given host country (Padmanabhan and Rao, 1999. This tendency towards isomorphism in entry mode strategy is consistent with the more broad observations that: Scholars have demonstrated that “The the more experienced a firm becomes with a particular strategy, the more likely it will be to use the strategy again” (Baum and Korn, 1999: 177; see also Padmanabhan and Rao, 1999). This consistency in entry mode strategy within a given host country emerges, whether a firm utilizes a merger and acquisition mode (Empirical studies have extensively examined different interorganizational strategic arrangements. Using the notion of “repetitive momentum,” for example, Amburgey and Miner (, 1992) find that prior merger and acquisition (M&A) experience enhances the probability of a firm to engage in the same type of activity again. or joint venture entries (Barkema and colleagues (et al., 1997) show that experience with joint ventures (JVs) is a driving force for new JVs because experiential learning entails exposure to partnership activities. The repetitive momentum that emerges with a particularly entry strategy is Prior alliance experience results in new opportunities to enter other alliances, because they develop both alliancea consequence of both the development of organizational capabilities specific to the management of that entry mode, as well as the positive and alliance reputation effects (Dyer and Singh, 1998: 667; see also Gulati, 1995; Walker, Kogut, and Shan, 1997).
We see experience as an important source of organizational inertia. The theory ofWhen organizational inertia sets in, suggests that changes in organizational strategies and structures can not change to match the pace of environmental change because of established organizational routines (Hannan and Freeman, 1984, 1989). Any changes that do occur within a and change at firm level will reset the clock of liability of newness (Amburgey, Kelly, and Barnett, 1993). Experience can this impede the adaptiveness and competitiveness of a firm when faced with a changed environment, such as when Following this logic, change makes experienced firms in a particular strategy have little experience in another strategy and thus lose their competitive advantages and reliability. It is unclear howan experienced firm s respond thefaces convergent pressures when that emerge when institutional conditions change. Further to this, experience can potentially
Because experience facilitates inertia when accumulated knowledge is translated into routines, experience with a particular entry strategy therefore constrains the potential for subsequent changes away from that strategy because of established routines and experiential inertia. On the other hand, however, experienced firms do change their strategic attempts of entry over time if the firm also tends to converge on good choices that fit better to the transformed environment. How experienced firms actresult in a firm exhibiting strategic differences differently fromas compared to de nova entrants in terms of their entry strategies remains elusive in the foreign entry literature.
An important area of strategic actions in a firm According to Dutton, Ashford, O'Neill, and Lawrence (2001: 716), “organizations are a cacophony of complementary and competing change attempts…” More recently, scholars have paid more attention tois their activities in foreign entry markets. attempts (Schneper and Guillén, 2004). Drawing on an institutional perspective and studies on experiential inertia, we examine the convergence-inertia relationship of foreign entry attempts at both country and firm levels to further the understanding of this issue. At the country level, we examine how widespread change in conditions of the host-country environment affects foreign entry attempts (i.e., convergent effect). At firm level, we differentiate relational entry (i.e., partnership-based entry) from hierarchical entry (i.e., independent entry). We examine how a firm’s relational entry experience is related to its hierarchical entry attempts (i.e., switching effect). In the study of strategic change, there is a need to put more micro level explanation into institutional theory (Johnson, Melin, & Whittington, 2003). Our study allows us to examine the interactive macro-micro forces in determining the change in foreign entry attempts (i.e., moderating effect).
P 5, 2nd para: ...convergent, repetive, swithching, and moderating effects. On page 1-4, we really don't discuss moderating effects, though we test for them. Need to say something about them.
The purpose of the present study is to extend existing studies on foreign entry strategies and provides a complementary argument to enlarge the research scope. Drawing on institutional theory, we formulate a set of hypotheses explaining how change occurs in foreign entry attempts in terms of convergent, repetitive, switching, and moderating effects. To test our hypotheses, we choose U.S. firms entering the eleven EU accession and associated transition economies as a study context. These formerly socialist countries are located in Central and Eastern Europe (CEE) and characterized by trends towards “marketization” and rapid institutional change during the transition process (Hoskisson et al., 2000). Their relatively consistent and successful transition to a market economy provides a good platform to examine our research questions.
Convergent Effect of the Change in Institutional Conditions
Institutional theory provides a useful theoretical explanation on firms’ international expansion/entry strategy and strategic change. The theory views the change as the processes of institutionalization, deinstitutionalization and reinstitutionalization (Greenwood, Suddaby, & Hinings, 2002), which is particularly useful to understand change in institutional conditions of local enterprises in the host country and its impact on foreign entry strategies. Grounded in the theory, both conformity and deviance of organizational actions have been viewed as a strategic response to institutional pressures (Oliver, 1991; Goodstein, 1994).
According to institutional theorists, organizations tend to align with industry norms and become similar through mimetic mechanism (DiMaggio and Powell, 1983). To obtain legitimacy, firms entering into a foreign market have to configure their strategies to local institutional environments and conditions, leading to the “isomorphic convergence” (Greenwood, Suddaby, & Hinings, 2002). Therefore, both legitimacy-seeking and imitative behavior of organizations prompts convergence in foreign entry attempts over time.
Because of changes in institutional conditions, the convergence of early movers in the earlier time may differ from the convergence of new comers in the later time. We thus define the convergent effect on organizational strategies in terms of the difference. Convergent effect takes place when de nova entrants shift away from one type of strategy widely adopted by earlier entrants and adopt another type of strategy when there are changes in the local institutional conditions. It is consistent with the definition of Hannan and Freeman (1984) on organizational change, which suggests that organizational change occurs when new entrants with new strategies and structures replace established organizations when environments change. In the case of foreign firms entering transition economies, the two-phase model of institutional transitions (Peng, 2003) have conceptualized that dominant foreign entry strategies unidirectionally converge from relational entries to hierarchical entries during the transition process, owning to the different levels of support from market institutions. For us, the convergent effect also reflects the social conformity of foreign firms to the local industry norms and, especially institutional conditions of the local enterprises.
The institutional condition of local enterprises is directly related to the entry strategies of foreign firms in terms of partner selection for relational entry, as well as target choice and post-acquisition integration for hierarchical entry. Since 1989, CEE transition economies have experienced a dramatic organizational transformation process and institutional conditions have become more compatible with market-oriented practices and templates. In some EU accession countries, such as Poland, Hungary, and Czech Republic, the transition to free market economies had largely completed. Changes in institutional conditions provide both incentives and constraints on foreign entry attempts. Foreign firms may reconsider their modes of entry in these economies over time. When time elapses, the change in institutional conditions will systematically affect the convergence of foreign entry attempts.
Repetitive and Switching Effects of Firm experiences
The choice of entry mode is the outcome of internal and external institutional pressures of the firm in a given host country (e.g., Davis, Desai, and Francis, 2000; Rosenzweig and Singh, 1991). A growing number of studies show that firm experience is related to legitimacy and uncertainty in the host country and thus plays an important role from institutional perspectives (e.g., Rodriguez et al., 2005; Henisz and Delios, 2001).
Barkema and Vermeulen suggest that future studies should examine the influence of different types of experience on foreign entry strategies (1998: 21). Among a variety of foreign entry strategies, we conceptualize them into two categories, relational and hierarchical entry, in terms of whether the entry is based on a partnership arrangement. A relational entry strategy refers to the market entry of a foreign firm drawing on business relations from one or more partners. It results in a partnership-based organizational form, such as joint venture, strategic alliance, or other mutual cooperative arrangements. In contrast, a hierarchical entry strategy refers to an independent entry or “go-it-alone” strategy, such as merger, acquisition, and wholly owned subsidiary (Wright et al., 1998; Hitt et al., 2000; Peng, 2003). This categorization is also consistent with the two distinct types of organizational forms: hybrid and hierarchy (Williamson, 1991).
While hierarchical entries are competitive, based on market prices, and risky, relational entries are cooperative, negotiated, and not so risky (Dyer, Kale, and Singh, 2004: 108). Partnership-based arrangements enhance legitimacy especially for de nova entrants in the host country. In contrast, hierarchical entry is independent of the firm’s partnerships with others (Brouthers, 2002; Peng, 2003). Using hierarchical entry strategies, firms tend to takeover the managerial, economic, and legal control (Newburry and Zeira, 1997) to achieve a higher level of intraorganizational isomorphism (Davis, Desai, and Francis, 2000).
Based on the classification above, we differentiate the switching effect from the repetitive effect of firm experiences. Similar to the notion of “repetitive momentum” (Amburgey and Miner, 1992), repetitive effect occurs when an organization repeats an action based on its experience on that action. In our study context, repetitive effect predicts that a firm’s future relational or hierarchical entry attempts are related to its past frequency of relational or hierarchical entries, respectively. We take a step further to explore why firms may also shift their future entry attempts away from their previous adopted strategies. We propose that switching effect may occur when an organization’s current or future hierarchical entry attempts are related to its past relational entry experiences.
We fully recognize that this definition is unidirectional. The track of change is from relational entry experience to hierarchical entry attempts. The rationale is that both relational and hierarchical arrangements are not equivalent strategic choice in terms of managers’ preference and propensity in the foreign market. Researchers have showed that multinational corporations (MNCs) tend to adopt full-control modes of entry (e.g., hierarchical entry) over low-control modes (e.g., relational entry) in order to retain control (Erramilli and Rao, 1993), to protect proprietary technology (Luo, 2001), and to achieve a high level of internal isomorphism (Davis, Desai, and Francis, 2000). Particularly, foreign entrants prefer a 100 percent ownership through acquisitions in transition economies (Uhlenbruck and de Castro, 2000; Meyer and Estrin, 2001; Peng, 2003), which help to transfer their own rules, practices and capacities to the newly acquired firms. On the contrary, using a relational entry strategy, firms may downplay their foreign image by using local brands and delay global standardization moves (Boisot and Child, 1999; Peng and Heath, 1996). We argue that the tendency of firms may create conditions necessary to overcome experiential inertia of relational entry experience.